Industrial manufacturers are investing heavily in digitalization as a source of innovation and new revenue streams. Yet, many face lower-than-expected revenues from digital services, and unexpected increases in delivery costs which risks undercutting the profit potential. To deal with this digitalization paradox, firms should adopt an agile customer focused co-creation process following a micro-service innovation approach creating a stable return on investment.
Digital servitization is a concept that captures the transformation in processes, capabilities, and offerings within industrial firms and their extended ecosystems of partners, in order to progressively create, deliver, and capture higher service value from enabling digital technologies such as the Internet of Things (IoT) and Artificial Intelligence (AI) (Sjödin et al., 2020). An example is Sandviks’s remote Optimine solution which transforms data from mining operations into actionable predictive insights, helping customers optimize the full mining process, capitalizing on the efficiencies of IoT and AI.
Typically, providers adopt a digital servitization strategy to create a competitive advantage that differentiates them from competitors and open the door for new revenue streams. However, digital service innovation is highly challenging for a number of reasons. First, technology is rapidly evolving, and companies often struggle to keep pace with the demand for complex digital system developments because it may extend beyond their existing capability base. The results are often long development cycles of increasingly complicated digital systems that ends up being outdated before they are even commercialized. Second, in digital servitization, value creation does not happen in internal R&D labs; it occurs at the point of customer contact, where value is realized in the use of the service to improve customers operation. What is required is a co-creative approach to identify the relevant use cases and problems to solve for a specific customer. Yet, most firms are not set up for co-creative innovation. Thus, despite investing considerable effort in developing digital services, many companies struggle to create real customer value, and both providers and customers risk failing to make a financial return on investment This pervasive complexity and uncertainty can lead companies into a digitalization paradox, where increasing revenues from digital services fail to deliver greater profits because of spiraling cost increases.
To address these challenges and understand how providers and customers co-create digital service solutions, we conducted in-depth qualitative study of multiple industrial relationships in various industries in Sweden (Sjödin et al., 2020). We summarize our insights in this article and present an agile co-creation framework for digital servitization (see figure 1). The framework describes the foundation of a micro-service innovation approach for agile co-creation as a means of coping with the digitalization paradox.
An agile co-creation approach for digital servitization
Our findings reveal a five-phase agile co-creation process for developing digital micro services. Phases include: 1) Need identification 2) Value prioritization, 3) Micro-service development 4) Implementation 5) Evaluation. An important characteristic is the iterative and agile way of working with micro-services to enable multiple short planning and execution cycles governed by customer and operational feedback.
As described by our informants a micro-service in the context of digital servitization is a focused digital service functionality which does one thing (i.e. solves a specific customer problem) and does it well. Accordingly, micro services lends itself to a continuous delivery of increasingly more sophisticated digital servitization solutions. For example, a construction equipment manufacturer described developing a weight loading micro-service which on its own had substantial effects in reducing fuel costs, and traffic congestion but coupled with other micro services over time such as positioning and traffic awareness enabled more a more effective site management. The full site management solution would thus emerge over several cycles of micro-service development, each adding a distinct value proposition to the overall solution. This approach means that providers and customers focus their attention on progressively addressing one customer need at a time rather than developing complex full-scale digital service solutions. Three overarching principles underpin the micro-service innovation approach: Start small and make incremental digital investments, use iterative sprints to solve customers’ problems, and prioritize operational testing and learning by doing According to our respondents, these principles truly reflect the flexibility, pace, and customer focus required in digital servitization. Further elaboration on these principles is provided below.
Start small and make incremental digital investments
A key approach to cope with the uncertainty surrounding the creation of new digital offerings is by starting small and making incremental micro-service investments. Indeed, our informants reported that digital services cannot and should not be planned as one large initiative; it is an iterative process in which providers and customers must agree on and prioritize initial opportunities to exploit digitalization together. This process involves making a series of small bets with the potential for large gains, employing a jointly negotiated investment strategy with the customer, and following recurring investment loops. By setting small, realizable goals and making small investments, providers can develop trust and commitment from customers and legitimate their innovation processes while reducing risk. A technology manager from a industrial manufacturer succinctly described how this approach of making quick iterations through micro-services is an optimal way of dealing with digitalization investment opportunities: “With digital services, we need to eat the elephant in small bites.”
After the first initial micro-service development cycle is completed, the process is repeated indefinitely to identify and prioritize new needs that should be targeted and met. There are several benefits to the micro-service approach. A focus on modularity means that the overall systems are easier to understand, develop, test, and make resilient to changing conditions. In addition, scalability is increased. Because micro-services are developed and implemented independently of each other, they can be scaled independently, simplifying commercialization.
Use iterative sprints to solve customers problems
To prioritize speed and customer value the manufacturer and customer should employ an iterative sprint-based development approach with clear and useable outputs at the end of each cycle (i.e., proof of concept). A key account manager from a equipment manufacturer described: “You need really tight relationships with the customer to truly understand their dilemmas and not only think that you understand it. You need to have joint sprints to be able to deliver value in a very agile and quick manner from a business perspective and from a technology perspective.” Each sprint follows an iterative process model of step-by-step development, implementation, and testing of improvements to advance quickly and then modify the details of the micro-service solution based on experience. Thus, the requirements and features of the micro-service are continuously evolving and being prioritized according to the value they bring. Informants underlined that quickly weeding out failing or low-value-adding micro-service concepts or features is important to avoid wasting scarce resources.
Prioritize operational testing and learning by doing
The agile co-creation process is firmly rooted in the benefits of continuously applying, testing, and refining solutions in an operational real-life environment. Micro-services must be tested in operational environments to allow companies not only to explore ways to refine routines for using the current service but also to identify new opportunities for the next iteration of micro-service development. Specifically, digitalization requires incremental improvement of the underlying routines for using the technology from the operational staff of both providers and customers. This approach enables stepwise digital capability development and increased trust in the solutions from the workforce. As a director of connected sites at an equipment manufacturer remarked, “It’s not only about the services we deliver. For me, it is more about the capabilities we build when implementing and refining these systems over time.”
The benefits of following the principles of the agile co-creation approach is the formation of customized, modular, and scalable offerings. By crafting such offerings, the potential of digitalization is realized by customers as their needs are progressively met through the development of an increasingly comprehensive digital solution consisting of multiple micro-services that build on each other. Focusing on quickly implementing customized micro-services that target specific needs demonstrates the value of digitalization for customers and creates trust for further co-creation. For providers, the micro-service approach enables progressive development, testing, and commercialization of modular and scalable micro-service offerings for paying customers. Over time, a more comprehensive portfolio of micro-services is developed, enabling the provider to configure more complex solutions. A final benefit is the ongoing focus on capability development as micro-services are quickly implemented and new routines for service delivery can evolve through learning by doing. That is the front end (i.e. customer service and support) and back end (e.g. technology implementation) capabilities for delivering value from digital services can be built in a stepwise fashion. We foresee this approach to have a high importance in speeding up the digital transformation of industry.
For more reading connected to this topic please see:
> Sjödin, D., Parida, V., Kohtamäki, M., & Wincent, J. (2020). An agile co-creation process for digital servitization: A micro-service innovation approach. Journal of Business Research, 112(5), 478-491. https://doi.org/10.1016/j.jbusres.2020.01.009
This work was conducted within the VINNOVA project “Digital Innovation of Business Models (DigIn)”. We gratefully acknowledge the support from VINNOVA and our industrial partners which made this research possible.